A Special Purpose Vehicle (SPV) is specifically designed to function as a distinct legal entity to execute a specific project. Typically, SPVs are set up as an independent legal entity to achieve a specific business objective, typically protecting the parent company from financial risks and potential losses. This approach enables companies to pursue new projects with significant investments and uncertainty while managing their overall risk exposure.1
In this article, we explore what SPVs are, their role in corporate finance and investments, their advantages, disadvantages, and their attendant legal obligations. Understanding these components is crucial when considering establishing or investing in an SPV.
WHAT ARE SPECIAL-PURPOSE VEHICLES?
An SPV is a separate legal entity established for a particular purpose that operates independently from its parent company. This separation provides an opportunity to isolate financial risk, assets, and liabilities associated with a specific project or investment.2
ROLE OF SPECIAL-PURPOSE VEHICLES IN CORPORATE FINANCE AND INVESTMENTS
When it comes to corporate finance, SPVs can be used to raise capital. Companies can use SPVs to issue bonds or other financial instruments to attract investors for specific projects. This mechanism can be more attractive to investors because the SPV's assets and cash flows would be dedicated to repaying the debt, thereby making the investment's risk and financial return more apparent to the investors.
Venture capital firms, for instance, often utilize SPVs to pool funds from several investors to invest in startups or innovative projects. This structure enables investors to participate in specific investment opportunities whilst limiting the risk associated with such investment to the particular SPV and not the venture capital firm's overall portfolio. An SPV makes it possible to consolidate multiple investments under a single entity.
ADVANTAGES OF SPECIAL-PURPOSE VEHICLES
SPVs offer significant advantages that make them an appealing option for companies and investors. One notable benefit is financial risk isolation. Companies can protect their main business from potential liabilities associated with specific projects or investments by separating assets and liabilities within an SPV.
SPVs serve as an attractive option to investors and lenders as the structure of an SPV allows for more transparency and focus on a single project or asset. This can simplify the due diligence process and risk assessment that may be undertaken by a prospective investor.3 Investors may be more likely to fund a project when they can clearly see how their capital will be used and how returns will be generated.
Furthermore, investors can invest directly in the project without exposure to the parent company's broader financial risks. This arrangement works for private equity firms and institutional investors that are looking to limit their risk exposure to specific projects.4
Moreover, SPVs can play a crucial role in managing regulatory compliance more efficiently, particularly in industries subject to stringent regulations. By structuring specific activities within an SPV, companies can effectively contain compliance issues and mitigate potential risks, thereby shielding their core operations from unnecessary exposure. This approach enables organizations to focus on their primary business activities while ensuring that regulatory requirements are met in a controlled and manageable manner.
DISADVANTAGES OF SPECIAL-PURPOSE VEHICLES
Although SPVs offer notable benefits, there are some potential disadvantages and risks that companies and investors should consider. One is the cost of establishing and running the SPV, which can be substantial for small companies or projects with limited budgets.
Another is reputational risk. In the event that an SPV fails or gets a bad reputation, this can have a negative chain effect on the parent company, even though, legally speaking, they are seen to be two separate entities.
Ethical issues may arise as SPVs can sometimes be used cunningly to hide debts or losses. It is crucial to ensure that SPVs are used ethically and in compliance with all legal and accounting standards to prevent misuse and the severe consequences that can follow.
LEGAL OBLIGATIONS OF SPECIAL PURPOSE VEHICLES IN NIGERIA
Operating an SPV in Nigeria requires compliance with various laws and regulations, including the Companies and Allied Matters Act, 2020 (CAMA), Corporate Affairs Commission's regulations, industry-specific regulations, amongst others. Understanding the regulatory requirements of operating an SPV in Nigeria is crucial for ensuring compliance and avoiding penalties.
Directors of an SPV have statutory responsibilities under CAMA, which include acting in the best interests of the company, exercising reasonable care, skill, and diligence, and avoiding conflicts of interest.
SPVs must comply with all filing requirements set by the Corporate Affairs Commission (CAC). This includes submitting annual financial returns and notifying CAC of any significant changes, such as changes in directors or registered office address.
The SPV must obtain a tax identification number and file its taxes with the appropriate tax authorities as and when due to avoid penalties and legal consequences. Furthermore, SPVs engaged in specific activities must adhere to industry-specific regulations.
PRACTICAL ADVICE FOR ESTABLISHING A SPV IN NIGERIA
Establishing an SPV requires careful planning and consideration of both the legal and financial implications of the SPV. To successfully navigate this terrain, it is advisable to consult experienced professionals such as solicitors, accountants, and tax advisors to ensure that the SPV is structured properly and complies with all regulatory requirements.
The SPV is required to be registered with CAC before commencing business in Nigeria. It is essential that a clear and comprehensive Memorandum and Articles of Association that outlines the SPV's purpose, governance structure, and operational procedures is drafted. These documents should reflect the specific needs of the SPV and provide a solid legal foundation for its activities.
CONCLUSION
Special Purpose Vehicles (SPVs) can be a game-changer for companies and investors seeking to navigate complex risks and capitalise on specific opportunities.
Footnotes
1. ESFC, 'SPV – Special Purpose Vehicles' https://esfccompany.com/en/articles/project-finance/spv-special-purpose-vehicle/ Accessed April 3, 2025
2. Uniwide Formation, 'Understanding Special Purpose Vehicles and Their Benefits' https://www.linkedin.com/pulse/understanding-special-purpose-vehicles-benefits-uniwide-formations-ywoae/ Accessed April 10, 2025
3. Supra Note 2
4. ESFC, 'SPV – Special Purpose Vehicles' https://esfccompany.com/en/articles/project-finance/spv-special-purpose-vehicle/ Accessed April 3, 2025
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
